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Execution of Contracts - Court of Appeal provides valuable reminder of the importance of formalities of execution

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The recent case of Integral Petroleum S.A. v SCU-Finanz AG [2015] EWCA Civ 144 concerned an agreement between two Swiss trading companies for the sale and purchase of up to 400,000 metric tons of oil products per year at the seller’s option. The contract provided that it would be governed by English law and that the English High Court would have exclusive jurisdiction. A number of matters, including the particular products, quantities and prices, were left to be specified in separate addenda to the contract and, it appears, were never agreed.

No products were ever delivered to the buyer under the contract and the buyer claimed US$1,150,000 in lost profits and damages on the basis that the seller had failed to deliver any products. The buyer commenced proceedings in the High Court, but the seller failed to file a defence and judgment was entered against it in default. The seller subsequently appealed against the judgment in default, for which it had to establish that it had a defence with a reasonable prospect of success. In doing so, the seller relied, among other things, on a defence that the contract had not been validly executed and therefore was not binding at all.

At first instance, the seller succeeded in setting aside the default judgment. The buyer then appealed to the Court of Appeal, asserting that the judgment in default should be maintained. The questions before the Court of Appeal included the question of whether the contract had been validly executed. The seller contended that execution was invalid because the contract bore only one of the two authorised signatures of the seller company that were required by Swiss law. The buyer argued that the question of execution should be determined under English law, being the law governing the substance of the contract.

The Court of Appeal reviewed the relevant conflict of laws rules under common law and statute and confirmed that the question of execution was an issue of the authority of one signatory to bind the seller company, which was a matter for the company’s constitution. This was governed by Swiss law, being the place of the seller’s incorporation. As Swiss law required the contract to be signed by two authorised signatories and it had only been signed by one, the contract was not binding on the seller. The Court found therefore that the first instance judge had been correct in finding that the seller’s defence was bound to succeed and dismissed the buyer’s appeal.

As this decision concerned only an appeal against the setting aside of a default judgment, the full merits of the buyer’s claim were not considered by the Court and, at first instance, the judge described the evidence as to what actually happened pursuant to the contract as extremely sparse. The judge commented that the argument that there was a contractual obligation to supply a minimum quantity of each product was open to serious question, presumably because the contract only provided that “up to” the specified amounts of cargo were to be delivered at the Seller’s option.

Integral’s experience is a reminder to parties to check at the time contracts are entered into that any necessary formalities are complied with and that those signing on behalf of a company have authority to bind it under their local law. Where there is any doubt it may be prudent to obtain confirmation from local lawyers.

For SCU-Finanz of course this lack of formal compliance offered a welcome exit route from the contract. The case was unusual in the fact that the issue of execution appears to have been largely a question of the actual authority of the signatory to bind the company, which was governed by the law of the place of the company’s incorporation, and issues of ostensible authority, which would instead be governed by the putative proper law of the contract (i.e. English law), do not appear to have arisen. The case was also slightly unusual in the fact that neither party appears to have taken steps to perform the contract and the Judge at first instance clearly doubted whether, even if the Contract had been validly executed, the Seller had been under any obligation at all. Where the parties have taken steps to perform or rely upon the contract, the question of whether they are bound by a contract in circumstances where execution formalities have not been complied with are likely to be complicated by issues of agency, waiver and estoppel. This case is unlikely to trouble those concerned with active contracts. Nevertheless, as SCU-Finanz discovered in some circumstances it may well be worthwhile in the event of a dispute to check whether the relevant contract has been properly executed.

 

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